Treasury 10-Year Yields Approach Highest in Almost Month on U.S. Economy

By Anchalee Worrachate and Wes Goodman - Jan 9, 2012 7:17 PM GMT+0700

Treasury 10-year note yields approached the highest level in almost a month before reports this week forecast by economists to show U.S. retail sales and consumer confidence increased.

Debt securities fell last week following the biggest annual rally since 2008 as the unemployment rate dropped in December. German Chancellor Angela Merkel is meeting French President Nicolas Sarkozy today to discuss the region’s debt crisis. The U.S. government will sell $66 billion of notes and bonds this week in its first auction of the securities in 2012.

“Economic figures out of the U.S. have surprised on the upside, and we are seeing some upward pressure on Treasury yields,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “But the rise in yields could be limited if the euro debt crisis worsens, and I don’t think we’ve passed the worst of the crisis yet.”

Yields on 10-year notes rose one basis point, or 0.01 percentage point, to 1.97 percent at 7:08 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 fell 3/32, or 94 cents per $1,000 face amount, to 100 1/4. Yields touched 2.04 percent on Jan. 6, the highest level since Dec. 13, and increased eight basis points last week.

Treasuries have trailed German bonds and British gilts this month, losing 0.4 percent compared with decreases of 0.1 percent for German and U.K. debt, according to indexes compiled by the European Federation of Financial Analysts Societies.

Outlook on Treasuries

Investors in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest interdealer broker, maintained their bearish stance on Treasuries. Ried’s index on the outlook through June rose to 45 for the seven days ended Jan. 6, from 44 a week earlier. A figure below 50 shows investors expect Treasuries to decline.

The U.S. government will sell $32 billion of three-year notes tomorrow, $21 billion of 10-year debt on the following day and $13 billion of 30-year bonds on Jan. 12.

The Federal Reserve is scheduled today to sell as much as $8.75 billion of securities due from April to September 2012 as part of the program of replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-dated debt to cap borrowing costs and foster economic growth.

U.S. reports this week are forecast to add to evidence that the recovery of the world’s largest economy is gathering momentum.

Retail Sales

Retail sales (RSTAMOM) gained 0.3 percent in December after increasing 0.2 percent in the previous month, according to the median forecast in a Bloomberg News survey before the Commerce Department’s report on Jan. 12.

The Thomson Reuters/University of Michigan preliminary consumer confidence gauge for January rose to a seven-month high, a separate survey showed before data on the following day.

The U.S. added 200,000 jobs in December, surpassing the median forecast of economists, the Labor Department reported last week. The unemployment rate fell to 8.5 percent, the lowest level since February 2009.

The difference (USGGBE10) between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, has widened to 2.09 percentage points from 1.95 percentage points at the end of last year. The 10-year average is 2.13 percentage points.

Treasuries pared their decline today after a report showed German industrial production dropped in November at a faster pace than economists forecast.

Projected Yields

Benchmark 10-year yields will climb to 2.6 percent by Dec. 31 from 1.88 percent at the end of 2011, according to the median forecast of economists and strategists in a Bloomberg News survey. Traders aren’t as optimistic, expecting an increase to 2.25 percent, based on forwards that use current trading levels to predict future rates.

The divergence shows traders see Europe’s debt crisis continuing to stoke demand for safety and containing yields even as the economy improves.

Predictions last year by both groups for a selloff proved wrong as Treasuries due in 10 years or more returned the most since 1995, even as President Barack Obama increased publicly traded debt (DEBPMARK) outstanding to a record $9.88 trillion and Standard & Poor’s stripped the U.S. of its AAA rating on Aug. 5.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net